Cannabis stocks are all the rage, but it's a bubble

Look! Over there! Did you see them? A whole group of lemmings following each other over a cliff. But there's something different about them.

They look, well, stoned.

And with good reason. The "hot money" (which, unlike the "smart money", really does exist) is running hard - and it's chasing one particular type of company: medical cannabis businesses.

Medical cannabis has been all the rage recently after the federal government announced that it would be legal to import and grow in Australia. From all reports, the product (usually in oil form) does have genuine medical benefit for certain conditions. And remember, we have used various opioids - derived from opium poppies - for centuries.

So, like all good manias, there's a kernel of truth to it. It's probable that there will be more - perhaps much more - cannabis grown and imported to serve medicinal purposes. And someone will need to import it, process it and sell it.

But who? And therein lies the bubble.

As bubbles go, it's a beauty. One company, Stemcell United (ASX:SCU) was an ASX tiddler, with a market capitalisation of about $3 million. Then it announced the appointment of an adviser to look at the potential of the medical cannabis market. The stock market's response?

Shares went up. More than 30-fold. In a single day.

From a $3 million stock to a $100 million company, on the back of a single press release. Announcing nothing more than the appointment of an adviser. (It helped that the adviser is apparently colloquially known as the King of Cannabis. I don't know if that title is hereditary or comes with the power to knight people or open fetes.)

I cannot tell you how dumb that is. Investors - a term I use loosely, in this instance - added $100 million of market value to a business that might not even get into the medical cannabis business. And if it does, might not be able to reach a commercial level of sales. Let alone profits.

And it's not just Stemcell United. The ASX's list of speculative medical cannabis companies are having a field day. These companies' share prices are white hot. Smoking, you could say.

And even minerals explorer Queensland Bauxite (ASX:QBL) is getting in on the act, recently announcing that the company "... is pleased to announce the progress of its investment in Medical Cannabis Limited" which is "furthering its plans within the Australian medical cannabis and hemp seed research and supply industry".

No, I have no idea what bauxite and cannabis have in common, either. But the share price of Queensland Bauxite has tripled since the company announced that investment in early March.

For the record, I have no doubt these companies have every intention of trying to strike it rich in medical cannabis. There might well be a lucrative market opportunity for someone - or even a few companies. But when a bauxite hopeful and a company that holds patents for orchid stem cells decide that they should instead be in the cannabis business, any sensible investor should be careful.

Foolish takeaway

It's always possible that an unscrupulous operator could just announce a move into cannabis to juice its share price. Or decide that, given the challenges of its current business, a "Hail Mary (Jane)" pass is in order. But investing in such companies is a risky - and frankly, silly - thing to do with anything other than money you've already set aside for the pokies. Like them, it's fun to play, and you might win for a little while - but the odds are well and truly stacked against you.

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Scott Phillips is the Motley Fool's director of research. You can follow Scott on Twitter @TMFScottP. The Motley Fool's purpose is to educate, amuse and enrich investors.